Npv And Discounted Cash Flows

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Chapter 8 Questions & Problems: 10, 11

10. NPV and IRR. A project that costs $3,000 to install will provide annual cash flows of $800

for

each of the next 6 years. (LO8-1 and LO8-2)

a. What is NPV if the discount rate is 10%?

Answer-

NPV = PV of cash inflows – PV of cost of the project (cash outflows)

= ($800*4.3553) - $3,000

=$484.24

b. How high can the discount rate be before you would reject the project?

Answer-

Using excel spreadsheet, we determine the IRR as follows:

Year

Cash flows

-3000

800

IRR

15.34%

Therefore, any discount rate above 15.34% (above IRR) would cause NPV to be negative hence

the project should be rejected.

11. NPV. A proposed nuclear power plant will cost $2.2 billion to build and then will produce

cash

flows of $300 million a year for 15 years. After that period (in year 15), it must be

decommissioned

at a cost of $900 million. (LO8-1 and LO8-2)

a. What is project NPV if the discount rate is 5%?

Answer-

NPV = PV of cash inflows – PV of cost of the project (cash outflows)

= ($300,000,000*10.3797) - $2,200,000,000 – ($900,000,000* 0.481)

=$481,010,000

b. What if the discount rate is 18%?

Answer-

NPV = PV of cash inflows – PV of cost of the project (cash outflows)

= ($300,000,000* 5.0916) - $2,200,000,000 – ($900,000,000* 0.0835)

= -$747,670,000

Chapter 9 Questions & Problems: 1, 2, 3, 5,

1. Cash Flows. Quick Computing currently sells 10 million computer chips each year at a price

$20 per chip. It is about to introduce a new chip, and it forecasts annual sales of 12 million of

these improved chips at a price of $25 each. However, demand for the old chip will decrease,

and sales of the old chip are expected to fall to 3 million per year. The old chips cost $6 each to

manufacture, and the new ones will cost $8 each. What is the proper cash flow to use to evaluate

the present value of the introduction of the new chip? (LO9-1)

Answer-

When evaluating the viability of a project, we use the present value incremental cash flows. The

incremental cash flows can be computed as follows:

Annual sales revenue (12,000,000*$25) $300,000,000

Less manufacturing cost (12,000,000*8) ($96,000,000)

Gross Profit from improved chips $204,000,000

Less lost profit from sale of old chips:

Lost revenue (7,000,000* $20) $140,000,000

Manufacturing cost ($6* 7,000,000) ($42,000,000)

Lost profit from sale of old chips ($98,000,000)

Incremental Cash flows to be used in project evaluation $106,000,000

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Chapter 8 Questions & Problems: 10, 11 10. NPV and IRR. A project that costs $3,000 to install will provide annual cash flows of $800 for each of the next 6 years. (LO8-1 and LO8-2) a. What is NPV if the discount rate is 10%? AnswerNPV = PV of cash inflows – PV of cost of the project (cash outflows) = ($800*4.3553) - $3,000 =$484.24 b. How high can the discount rate be before you would reject the project? AnswerUsing excel spreadsheet, we determine the IRR as follows: Year Cash flows 0 -3000 1 800 2 800 3 800 4 800 5 800 6 800 IRR 15.34% Therefore, any discount rate above 15.34% (above IRR) would cause NPV to be negative hence the project should be rejected. 11. NPV. A proposed nuclear power plant will cost $2.2 billion to build and then will produce cash flows of $300 million a year for 15 years. After that period (in year 15), it must be decommissioned at a cost of $900 million. (LO8-1 and LO8-2) a. What is project NPV if the discount rate is 5%? AnswerNPV = PV of cash inflows – PV of cost of the project (cash outflows) = ($300,000,000*10.3797) - $2,200,000,000 – ($900,000,000* 0.481) =$481,010,000 b. What if the discount rate is 18%? AnswerNPV = PV of cash inflows – PV of cost of the project (cash outflows) = ($300,000,000* 5.0916) - $2,200,000,000 – ($900,000,000* 0.0835) = -$747,670,000 Chapter 9 Questions & Problems: 1, 2, 3, 5, 1. Cash Flows. Quick Computing currently sells 10 million computer chips each year at a price of $20 per chip. It is about to intr ...
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Tags: net present value annual cash flows Discounted cash flows internal processes inside a corporation proposed nuclear power plant